The national mortgage arrears rate has reached its highest level in a decade at 1%, with households in Western Australia and the Northern Territory showing the most cause for concern.
The new figures were revealed by Reserve Bank Deputy Governor, Guy Debelle, in a speech in Sydney last Friday, though he maintained that while the ongoing rise in households defaulting on their home loans is worth scrutinising, arrears rates are still relatively low.
“The mortgage arrears rate, at 1 per cent, is low by both historical and international standards. Arrears in the US peaked at around 10 per cent in the financial crisis,” he said.
“This is not surprising in an environment where the unemployment rate is low and interest rates have been declining. Nonetheless, the arrears rates have been increasing steadily over recent years to the highest it has been for around a decade, and so warrants some scrutiny.”
According to the RBA, mortgage holders generally go into arrears as a result of an unexpected loss of income such as losing their jobs, suffering health problems or having a breakdown in their relationship.
In the case of the most recent figures, the RBA has suggested that rising levels are being driven by the fact that loans are staying in arrears for a longer period (90 days and more), rather than more loans actually entering arrears.
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The figures also show that rates of arrears are not spread evenly across the country.
Western Australia and the Northern Territory currently have the highest rates of mortgages in arrears, with the rate in Western Australia having risen from 0.70% to 1.80% on the back of rising unemployment and falling house prices in recent years.
Despite the recent national upward trend, Debelle stated that a number of factors are likely to but “downward pressure” on mortgage arrears.
“...it seems unlikely that the national arrears rate will increase substantially from here. Improvements to lending standards have placed downward pressure on arrears.”
“In addition, the recent reductions in the interest rates will reduce the interest payments of indebted households and support employment growth and housing market conditions more generally.”
What does going into arrears actually mean?
While the proportion of Australian households that end up in arrears is relatively tiny, it may still be worth knowing what it actually means and what effect it could have on mortgage holders.
“Basically being in arrears means that a borrower has not been making the required repayments on their home loan,” said Mozo Property Expert, Steve Jovcevski.
“Technically you’re in arrears as soon as you miss a repayment, but things really start to get serious after about three months (90 days), which is roughly equivalent to three repayments being missed.”
So what should you do if you think you may have difficulties in the future making your home loan repayments?
Jovcevski suggests that borrowers take action as soon as possible, either by contacting their lender or thinking about refinancing.
“If you've borrowed from a bank there are hardship clauses which mean that your bank may be compelled to offer you assistance if you go into arrears.”
“Unfortunately if you’ve already missed repayments on your mortgage it’s very hard to refinance. It won’t rule you out forever though, so if you are able to get back on track and showcase at least six months of clean repayments you’ll likely be able to refinance.”
“Of course in an ideal world you would want to refinance to a lower mortgage rate and avoid going into arrears in the first place, before you miss a repayment.”
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